Over the past few weeks, you may have noticed headlines about governments needing to bailout several different banks, including Credit Suisse, one of Europe’s largest banks. Some of the headlines may have been quite alarming, particularly those drawing parallels between the current events and those of 2008 when the Lehman Brothers bank collapsed.
Events like this can sometimes have a short-term impact on the stock market. That’s why it’s so important to understand what’s happened and how it could affect your investments and savings.
Read on to learn more about what happened at Credit Suisse, how it could affect your investments, and why the bank’s collapse is quite different from the events of the 2008 financial crisis.
Credit Suisse experienced significant losses in 2022
The news of its recent takeover is not the first time Credit Suisse has been in the headlines over the past few years. In fact, the bank has been embroiled in several controversies, including corporate espionage and, in 2022, it received a substantial fine for failing to prevent money laundering.
In late 2022, the bank was in the process of restructuring, as well as paying legal fees related to a number of court cases, when customers began withdrawing unexpectedly large sums of money. This led to an annual loss of CHF 7.3 billion (around GBP 6.5 billion) in 2022.
A statement from the bank’s top backer further spooked customers and investors
These significant losses understandably caused some concern about the health of Credit Suisse and its ability to recover. But concern quickly turned to panic when top shareholder the Saudi National Bank, said it couldn’t provide any further funding to support Credit Suisse.
The reason behind this decision was not down to a lack of confidence in the bank, as many assumed, but rather due to regulatory restrictions. The Saudi National Bank already owned 9.8% of Credit Suisse in shares and weren’t permitted to own more than 10%.
But regardless of the reason, the market was spooked and customers withdrew more funds to move them to “safer” institutions. Even though the Swiss National Bank offered Credit Suisse a credit line of USD 54 billion, it wasn’t enough to turn things around.
UBS acquired Credit Suisse for USD 3.2 billion
Credit Suisse’s stock price plummeted on 15 March, and Swiss authorities made the decision to take over the bank. The authorities worked through the weekend to secure a buyer and eventually, competitor bank UBS agreed to take over Credit Suisse for USD 3.2 billion.
The acquisition means that customers’ money is safe, as UBS has plenty of liquidity and none of the legal problems that Credit Suisse was dealing with. UBS is also guaranteed by the Swiss National Bank and the government, providing even more security.
The intervention of central banks differentiates recent bank failures from the events of 2008
There’s been a lot of speculation in the headlines that the collapse of Credit Suisse so soon after Silicon Valley Bank in the US means we may be about to see a repeat of the 2008 financial crisis.
But on closer inspection, you’ll note a key difference between this event and the collapse of the Lehman Brothers in 2008: the intervention of the central banks. This has protected the wider economy and financial markets from being affected by the problems that led to Credit Suisse’s demise.
This has been the case for several key financial events over the past year. In late 2022, the Bank of England (BoE) stepped in to avoid wider market turmoil after the fallout from Kwasi Kwarteng’s mini-Budget put some pension funds at risk in the UK.
Similarly, the Swiss National Bank and financial regulators worked to avoid the risk of contagion when Credit Suisse came into difficulty, just as US regulators did for Silicon Valley Bank.
Former deputy BoE governor Sir John Gieve told the Independent “the message is absolutely clear that the central banks are standing behind these banks that are getting into trouble”.
The merger led to some volatility on the stock market
Given the close succession of the Silicon Valley Bank and Credit Suisse takeovers, you may have seen some volatility on the stock markets over recent weeks, particularly in the banking sector. CNN reported some initial volatility on the Monday morning after the Credit Suisse takeover, but some stocks had begun to recover by the afternoon.
Investor confidence has been rocked by these events, so some people may be moving money out of smaller banks and into larger, more established ones. This could put smaller banks or companies under pressure as it becomes more expensive for them to raise capital.
Remember, though, that investments are for the long term. While it can be worrying if your portfolio doesn’t perform as well as you’d hoped, fluctuations in value are part and parcel of investing in the stock market. Rather than worrying about short-term events, it’s usually best to focus on your long-term goals.
You can learn more about how to manage your portfolio during times of economic uncertainty on our website.
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If you have any concerns about how recent financial events could affect your wealth, or you’d like to learn more about how to manage your wealth, we can help. Either contact your financial planner directly, email us at firstname.lastname@example.org or fill in our online contact form to organise a meeting and we’ll get in touch.